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Shedding Some Light On Your Risk

June 11, 2000

BusinessWeek Investor -- The Barker Portfolio

Shedding Some Light on Your Risk

Just how risky is your portfolio? If you really can't say, relax. Neither can I, nor can most anyone else I've met. Yet a new and impressive Web-based service I've been testing promises to offer us at least a clue--and maybe more.

It's called RiskGrades. It's built on the idea that any financial asset's riskiness, or price volatility, can be measured against a single common standard. In this case, the benchmark is a widely diversified basket of stocks from around the world. Its "RiskGrade" is set at 100. So, for example, when I checked the other day, General Electric's stock got a grade of 195 (table). That meant GE was nearly twice as risky as a basket of global stocks. Amerindo Technology Fund's grade of 386 signals that it's almost four times as risky, while Pimco Low Duration, a short-term bond fund with a grade of 8, carries one-twelfth the standard's risk.

Behind this service is RiskMetrics, a privately held spin-off of J.P. Morgan that has been measuring portfolio risk this way for big financial institutions since 1994. Morgan, which kept a stake in the company, offers RiskGrades at its Web site for its individual-investor clients, and a second part-owner, Reuters, feeds raw price data into RiskMetrics' computers. At the same time, RiskMetrics licenses RiskGrades to what it hopes will be many other brokers and advisers. Anyone, however, can use it for free after registering at the RiskGrades site, www.riskgrades.com."XLOSS." What will you find there? Most prominently, there's a little window in the upper left-hand corner where you can enter the ticker symbol for most U.S. stocks, funds, and indexes, plus those in five European countries and Japan. Click "go!" and you'll soon get a RiskGrade, which is updated daily, after markets close in Asia, Europe, and the U.S. The Nikkei 225 Index? 136. eBay? 559. Janus Twenty Fund? 202. Each RiskGrade is calibrated to your home currency. So, reflecting currency risk, an investment in GE is riskier if your base currency is the euro and riskier still if it's the yen.

RiskGrades alone are curiosities. You can learn a lot more by working with a portfolio. As a test, I created a hypothetical $500,000 portfolio with a mix of funds, Treasury bonds, and cash, plus $50,000 in each of three stocks: GE, Mellon Financial, and Motorola. What did I learn? A lot, starting with the portfolio's overall RiskGrade of 75. More striking was the so-called "RiskImpact" of Motorola. It created 33% of the portfolio's risk, more than twice that of GE or Mellon. A "What If?" tool let me see the result of swapping Intel for Motorola: The portfolio's RiskGrade would drop four points, and its "XLoss"--how much might be lost on an extremely bad day--would fall to $8,584 from $10,228.

RiskGrades tells all this and more in a variety of tables and charts. They're not simple, but they're clear. I hit a few snags, such as RiskGrade's inability to assess the "stable value" funds in many 401(k)s because their prices don't fluctuate. Some glossary links failed, a bug suffered by some Netscape users. (Another drawback: It doesn't work with Macs yet.) And while the site has gone far in making its grading scheme transparent--a 61-page document lays it out, equations and all--some opaque stuff persists. Eventually you may feel overwhelmed by numbers, but a tutorial on risk helps. The two hours it took me was worth it, if only for spelling out the limits of any risk measure: They can't see the future and are less useful the longer your investment horizon.

Yet, as the tutorial asks: "Would you play a game of roulette without knowing the odds first?" In casinos and on the Street, people do that routinely, me and probably you included. "Return is only half the equation," RiskMetrics CEO Ethan Berman told me. "You need to combine risk and return to make a proper investment decision." He's right, and RiskGrades help.Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711By Robert BarkerReturn to top